Comparing Section 179D and 45L: Which Tax Incentive is Right for Your Project?

Tax incentives play a crucial role in promoting energy-efficient building practices. Among the most significant are Section 179D and Section 45L, each offering substantial financial benefits. But which one is right for your project? This blog will compare these two incentives to help you make an informed decision.

Tax incentives play a crucial role in promoting energy-efficient building practices. Among the most significant are Section 179D and Section 45L, each offering substantial financial benefits. But which one is right for your project or can you use both? This blog will compare these two incentives to help you make an informed decision.

Understanding Section 179D and 45L:

Section 179D: Section 179D, also known as the Energy Efficient Commercial Buildings Deduction, is designed to encourage energy-efficient improvements in commercial buildings. It provides tax deductions of up to $5.00 per square foot (plus yearly inflation adjustments) for energy-efficient upgrades. These upgrades can include HVAC systems, interior lighting, and building envelope enhancements. To qualify, improvements must achieve at least 25% energy savings compared to an ASHRAE 90.1 baseline.

Section 45L: Section 45L focuses on residential buildings and offers tax credits for constructing or renovating energy-efficient homes. The credit provides up to $5,000 per unit for residential buildings that meet specific energy-saving standards, such as those certified under the Department of Energy's Zero Energy Ready Home program. This credit is aimed at incentivizing developers to adopt energy-efficient practices in residential construction.

Eligibility and Application:

Section 179D:

• Eligible Buildings: Commercial buildings and high-rise residential buildings (4 or more stories above grade).
• Eligible Improvements: HVAC and hot water systems, interior lighting, and building envelope enhancements.
• Who Can Benefit: Building owners, lessees, and designers (for government or tax-exempt buildings). Learn more about how designers can benefit here. 

Section 45L:

• Eligible Projects: Single-family homes, multifamily units, high-rise and low-rise residential buildings.
• Certification Requirements: ENERGY STAR or Zero Energy Ready Home certification.
• Who Can Benefit: Residential developers and builders.

Benefits and Savings Potential:

Section 179D:

• TaxDeduction Rate: Up to $5.00 per square foot (plus yearly inflation adjustments).
• Examples: A 100,000 square foot building with energy-efficient improvements can qualify for up to $5.65/SF or $565,000 in deductions.
• Reduced Energy Costs: Energy-efficient upgrades can lower utility bills, reducing overall operating costs.

Section 45L:

• Per-Unit Tax Credits: Up to $5,000 per unit.
• Examples: A 100-unit multifamily project could receive up to $500,000 in tax credits.
• Offset Costs: These credits can help offset the costs of advanced energy-efficient technologies.

Recent Enhancements:

Both programs have seen significant updates, particularly with the updated passing of the Inflation Reduction Act.

Section 179D:

• Increased Deduction: From $1.80 to $5.00 per square foot.
• Deduction Reset: Eligible entities can claim the deduction multiple times.
• Alternative Method: Qualified retrofit projects that reduce the overall EUI score are eligible.

Section 45L:

• Increased Credit Amounts: Up to $5,000 per unit.
• Expanded Eligibility: Now includes mid and high-rise residential buildings.
• Updated Standards: Aligns with ENERGYSTAR or the DOE’s Energy Star and Zero Energy Ready Homes programs.

Tax Application:

Section 179D:

• Tax Deduction: Reduces taxable income for the year the deduction is claimed.
• Accelerated Depreciation: Accelerates depreciation of the building and pairs well with a cost segregation study

Section 45L:

• Tax Credit: Reduces tax liability in the year the units are leased or sold.
• Incentive Overlap: Does not conflict with other incentives such as the low-income housing tax credit.

Choosing the Right Incentive:

When determining if you are eligible for the Section 179D and Section 45L incentives, consider the type of project and the potential financial benefits.

• Section 179D: Ideal for commercial buildings or high-rise residential projects focused on comprehensive energy-efficient improvements. Offers substantial deductions that can significantly reduce tax liabilities.
• Section 45L: Best suited for developers aiming to construct and sell/lease residential properties. Provides direct financial incentives that can make sustainable residential projects more viable and attractive to environmentally-conscious buyers.

Conclusion:

Both Section 179D and Section 45L offer value for energy-efficient building practices and for the right project, you may be able to capture one or both incentives. By understanding the benefits and eligibility requirements of each program, you can maximize your tax savings and contribute to a more sustainable future. For personalized advice and assistance in navigating these incentives, consult with TaxTaker today and start optimizing your energy-efficient projects.